Higher demand paired with lower inventory has led prices to increase across the board. This limited inventory is mainly due to two factors: years of repressed new home starts and lower foreclosure rates.
For the last 5 years, new home starts have been down. 2013 marks the first year since the bust when home builders see promise in the market place. But for five years, building was down. Now that the demand and prices have come back, builders are scrambling to meet demand. Until then, buyers will continue to compete for properties in the current inventory.
Over the last year, distressed property sales have dropped from 25% to 18% of all Real Estate transactions, according to Chris Isidore of CNNMoney. These sales, dominated by bank REO’s and short sale properties, have kept prices low in many markets. I’ve seen a reduction in the number of these types of properties first hand. As foreclosures become less and less a part of the sales inventory, traditional sellers end up as winners.
It’s as simple as the law of supply and demand. When demand outpaces supply, prices rise. The proof is in the pudding of our current housing market.
Though mortgage interest rates have begun to creep higher, they continue to stay near historic lows. Following the restructuring of the lending industry at the end of the last decade, banks are doing a much more thorough job at screening borrowers. People know they’ll need to jump through hoops, and they are prepared. What we are seeing right now is a pool of buyers that are qualified and ready to move into homeownership. This pool continues to grow. Buyer traffic is up 29% from last year, but inventory is down 10% (Gary Thomas, NAR President).
As a Real Estate investor, it’s easy to get excited when I see this rise in prices. It’s time to dust off those rental properties purchased at the bottom of the market and start getting ready to sell. If you weren’t lucky enough to grab any of those great deals, do not despair. There is still plenty of good news.
Last year I saw one of my students make nearly $300,000 doing 4 rehabs. His goal this year was to flip 12 houses, but competition for fix-and-flip rehabs has been pretty cut throat. So what’s the result? He’s only done 2 so far this year. But…the profits from those 2 deals are nearly what he made last year with 4 projects.
The moral of the story is that patience is a virtue. Deals may be tough to get right now. Competition has made it harder to get the right properties at the right numbers. When those deals do come, the reward is the increased profits fueled by the upward momentum of sales prices.
So, are the happy days of quick, easy money back in the Real Estate investing industry? Quick and easy are telltale signs of pending catastrophe, so I hope not. But signs of a full recovery in the US Real Estate market give me a lot of hope for the rest of the economy. There will always be opportunity for smart investors to make money in Real Estate – whether the market is up or down.